The International Monetary Board has praised the Dominican economy for what it describes as its “vibrant performance” in its report on its latest consultation with the Dominican economic authorities. The report highlights that growth has averaged over 7% during 2014-15 fueled mainly by domestic demand. The forecast, nevertheless, is for growth to slow to 5.4% in 2016 and to its longer-term potential rate of 4.5n5% by 2017. The moderate outlook is said to be tilted to the downside, largely owing to potential negative spillovers from weaker growth in advanced economies.
The IMF states that the challenge for macroeconomic policies will be to sustain high growth rates and address remaining poverty and inequality challenges, further strengthening the fiscal position, limiting risks of negative international spillovers and tackling long-term legacies in the electricity sector.
The IMF says that addressing long-standing problems in the electricity sector remains key to improving growth prospects. It highlights that the needed measures include significant upgrades to the public distribution networks, a move towards cost recovery pricing and reducing regulatory uncertainty. This would also foster a stronger investment climate needed to narrow infrastructure gaps, while increased product market competition and labor market flexibility would strengthen the economy’s competitiveness.
The IMF recommends a transition towards more exchange rate flexibility and the continued buildup of reserves will increase resilience against external spillovers and shocks. It states that the challenges of managing monetary policy and legacy quasi-fiscal debts should be tackled through increased coordination with the fiscal authorities in avoiding overlap between two issuers to develop the local bond markets and in firming up the recapitalization arrangements.
According to the IMF, the Dominican economy benefited from the decline in oil prices that has boosted disposable income, and from the consumption-led recover in the US through its linkages with robust tourism and remittance flows. It also reports strong growth in private investment dovetailing the expansion in consumption.
The IMF says that actual inflation was just over 2%, below the Central Bank target of 4?1% reflecting the oil price effects.
The IMF reports that the current account deficit is estimated at about 2% of GDP by end-2015 and reserves recovered to a level equivalent to over three and a half months of imports, excluding free-trade zones. The current account deficit and the real exchange rate are broadly in line with the economy’s fundamentals.
Also on the positive end, the IMF reports that the monetary policy stance remained broadly neutral during 2015. Softening core inflation prompted several rounds of interest rate cuts by the central bank in early 2015, to 5 percent, which offset an earlier policy tightening. The banking system continues to show healthy capitalization, profitability and asset quality.
In its statement issued yesterday, Tuesday 1 March 2016, the IMF states:
Fiscal policies continued to safeguard the gains from the recent fiscal consolidation. The fiscal adjustment during 2013n14, to a consolidated public sector deficit of about 4.5 percent of GDP, has been critical in restoring confidence. Excluding one-off receipts, the deficit in 2015 is estimated to have been maintained at broadly similar levels as the previous year. This, together with the face value reduction in public debt (by 3.1 percent of GDP) due to the restructuring of the Petrocaribe liabilities, moderated the increase in consolidated public sector debt (including the debt of the electricity sector and the central bank) to 48.5 percent of GDP estimated by staff for 2015.
In its recommendations, the IMF focuses on need for more taxation. It states:
Fiscal sustainability and social spending pressures require renewed attention to strengthening the fiscal position. Over the medium-term, public debt is set to rise due to large consolidated deficits, and additional pressures are building from the need to sustain adequate infrastructure and social spending. The authorities’ continued commitment to fiscal discipline is welcome, and the favorable cyclical position provides a good opportunity to undertake the adjustment to put debt on a downward path. A major effort is needed to expand the narrow tax base, eroded by tax exemptions and incentives, and to tackle inefficient spending, including on generalized electricity subsidies.
